Deck 8: Execution of the Audit Testing of Controls

Question 1

The purpose of preventive controls is to discover fraud or errors that may have occurred during transaction processing and to rectify those errors.

Answer 1

False

Question 2

Benny Pecarve is planning to visit an airline company to review the collective assessment of the client's control environment, risk assessment process, information system, control activities and monitoring of controls. What does this mandate describe?

A) entity level controls
B) transaction-level controls
C) both a and b
D) none of the above

Answer 2

A

Question 3

The more complex the client's operations and its internal controls, the less experienced the auditor who performs the work needs to be.

Answer 3

True

Question 4

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are not modified.

Question 5

IT general controls are driven by the particular software application being used.

Question 6

Benchmarking is an audit strategy that can be used to carry forward the benefit of certain application controls testing into future audit periods.

Question 7

Ben Simon wants to ensure that sales in a retail outlet are not recorded at the wrong amount. Which preventive control will help him ensure his objective?

A) the signature of the goods by the warehouse receiver on a receiving report or a bill of lading
B) a credit check by the credit manager
C) automatic pricing of sales invoices using a master price file
D) none of the above

Question 8

Transaction-level controls are implemented by businesses to reduce the risk of misstatements due to error or fraud and to ensure that processes are operating effectively.

Question 9

Tests of account balances can often provide evidence about the continued functioning of controls.

Question 10

Rolland Meilleur, public accountant, is testing whether his client's account coding on each purchase order is checked by the computer to a table of valid account numbers, and that various logic tests are performed by the computer. He is trying to mitigate the following from going wrong:

A) detective controls not being in place.
B) amounts being posted to the wrong accounting period.
C) transactions being classified and coded to incorrect accounts.
D) all of the above.

Question 11

Sue Stableford will be reviewing those controls that stop fraud or errors from occurring. This is an example of a review of

A) detective controls.
B) preventive controls.
C) entity-level controls.
D) transaction-level controls.

Question 12

The greater the degree of reliance on an internal control, the less they test the control to provide the required assurance.

Question 13

To improve efficiency, auditors test only those controls that they believe are critical to their opinion.

Question 14

Re-performance involves the auditor re-performing the control to test its effectiveness.

Question 15

An example of a purely manual control is a locked stock cage for high dollar-value items.

Question 16

If inherent risk is low and a reasonable level of assurance has been gained from controls testing, extensive substantive procedures need to be performed to estimate the dollar value of any error in an account balance.

Question 17

Attribute sampling is a sampling technique used to reach a conclusion about the total dollar amount of misstatement in an account balance.

Question 18

Tracing certain amounts on the bank reconciliation to the accounting records is an example of inspection of physical evidence.

Question 19

Enquiry involves the auditor observing the actual control being performed.

Question 20

Millicent Vonareva was reviewing her IT General Controls program for her client visit. She noticed an item that she thought did not belong in her "Controls to prevent unauthorized access to data" section of the program. Which item did not belong there?

A) Data files and critical applications are regularly backed up in offsite locations.
B) Program changes are subject to formal change management procedures.
C) Policies exist to ensure departing employees are denied access to software programs and databases.
D) Aall the above items belonged in the "controls to prevent unauthorized access to data" section of the program.

Question 21

Lucia Dottore, an audit senior, performed a review of certain application controls at a clothing manufacturing client. Which one of these controls is an input control?

A) Reconciliation of totals where input totals are compared to the output totals.
B) Output is printed to a secure printer where access is limited.
C) Reasonable checks: actual data is compared to expected data for reasonableness.
D) None of the above.

Question 22

It is important that detective controls:

A) identify all potentially significant errors.
B) completely and accurately capture all data.
C) are performed on a consistent and regular basis.
D) all of the above.

Question 23

Which of the following is an example of a preventive control?

A) management level reviews of actual performance versus budgets
B) credit manager following up on an exception report showing sales made to a customer who has exceeded their credit limit
C) sales invoices are automatically priced using the information in the price master file
D) a bank reconciliation

Question 24

Enquiry involves the auditor:

A) using questioning skills to determine how the control is completed and whether it appears to have been carried out properly and on a timely basis.
B) re-performing the control to test its effectiveness.
C) the auditor observing the actual control being performed.
D) testing the physical evidence to verify that a control has been performed properly.

Question 25

Manual controls:

A) generally rely on the client's IT applications in some way.
B) support the ongoing functioning of the programmed aspects of preventive and detective controls.
C) can be classified as program change controls or logical access controls.
D) do not rely on the client's IT environment for their operation.

Question 26

The senior auditor has no physical evidence that a control was performed, who performed it, or how effectively it was performed. What is the nature of this control?

A) internal control
B) entity-level control
C) detective control
D) preventive control

Question 27

The two main objectives of internal controls are:

A) to support the automated parts of the business in the functioning of the controls in place.
B)
B) to prevent or detect misstatements in the financial statements.
C) both a and
D) none of the above.

Question 28

An example of a program change control is:

A) the accounts receivable clerk does not have access to the cash payments application.
B) regular and timely back-ups of data.
C) program change forms must be authorized by the IT manager.
D) all of the above.

Question 29

Tracing certain amounts on the bank reconciliation to the accounting records is an example of which technique for testing controls?

A) observation
B) enquiry
C) inspection of physical evidence
D) re-performance

Question 30

A computer program that will not allow a sale to be processed if a customer has exceeded its credit limit is an example of a:

A) preventive control.
B) test of controls.
C) detect control.
D) substantive procedure.

Question 31

The major limitation with the observation technique for testing controls is that:

A) the employee may not be truthful in telling the auditor how the control procedure is performed.
B)
B) the employee may perform the control procedure more diligently when they know they are being observed.
C) Both a and
D) none of the above.

Question 32

The factors to consider when deciding the extent of testing of controls include which of the following?

A) the persuasiveness of the evidence produced by the control
B) the degree to which the auditors intend to rely on the control as a basis for limiting their substantive tests
C) how often the control is performed
D) all of the above

Question 33

Theo Lillis performs the following application control procedures: (i). Control totals: Input totals are balanced and reconciled
(ii). Reasonable checks: Actual data is compared to expected data for reasonableness
(iii). Sequence tests: Sequential data is reviewed and exception reports are produced for missing numbers. Which of the above application controls do these procedures apply to?

A) processing controls
B) output controls
C) input controls
D) general controls

Question 34

When the auditor decides to include controls testing in their audit strategy, they select those controls that:

A) are the easiest to test.
B) provide the most efficient and effective audit evidence.
C) provide no assurance that the controls operated effectively throughout the period of reliance.
D) provide the least efficient and effective audit evidence.

Question 35

The auditor had the following procedures in his audit program for a client: (i) Review performance versus forecasts
(ii) Review performance indicators
(iii) Review exception reports
What are these instructions related to?

A) detective controls
B) physical controls
C) internal controls
D) entity-wide controls

Question 36

Tests of controls do not include which of the following auditing techniques?

A) re-performance
B) confirmation
C) enquiry
D) observation

Question 37

Which of the following is an example of a detective control?

A) account coding on purchase orders being checked by the computer to a table of valid account numbers
B) quarterly reviews of credit balances in accounts receivable to determine their causes
C) amounts are not able to be paid to employees without first matching a valid tax file number to the employee master file
D) none of the above

Question 38

Controls can be classified as:

A) information technology general controls.
B) automated controls.
C) manual controls.
D) all of the above.

Question 39

Rosie Garaga spent the past week designing audit procedures to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements of a major bookstore operation at the assertion level. What types of audit procedures did she employ?

A) entity-level controls
B) detective controls
C) tests of controls
D) preventive controls

Question 40

Which of the following statements is correct?

A) Preventing errors during processing should not be an important objective of every accounting system.
B) Preventive controls can be applied to each transaction during normal processing to avoid errors occurring.
C) To be effective, controls over transactions should only include detective controls.
D) The purpose of preventive controls is to discover fraud or errors that may have occurred during transaction processing.

Question 41

Which of the following statements is correct?

A) Tests of account balances can often provide evidence about the continued functioning of controls.
B) An ineffective entity-level control environment may allow the auditor to limit their tests of controls to enquiry and observation.
C) Auditors do not need to investigate any control exceptions identified during their testing.
D) Tests of account balances never provide evidence about the continued functioning of controls.

Question 42

In trying to determine whether there is a need for additional detailed tests of controls, which of the following factors are considered?

A) evidence provided by other tests
B) changes in the overall control environment
C) results of enquiries and observations
D) all of the above

Question 43

Benchmarking is:

A) based on the premise that a computer will continue to perform any given procedures in exactly the same way until such time as the program is changed.
B)
B) an audit testing strategy that can be used to carry forward the benefit of certain application controls testing into future audit periods.
C) both a and
D) none of the above.

Question 44

What are the factors considered by auditors in determining whether there is a need for additional detailed tests of controls?

Question 45

A sampling technique used to reach a conclusion about a population in terms of a rate of occurrence is known as:

A) dollar unit sampling.
B) random sampling.
C) attribute sampling.
D) haphazard sampling.

Question 46

Discuss the factors that relate to the likelihood that an internal control operates as intended.

Question 47

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) The audit senior was explaining how different controls work: "Detective controls can be applied to each transaction during normal processing to avoid errors occurring."
b) The public accountant was reviewing the audit program and was convinced that the following item did not belong in the IT General Controls (ITGC) part of her audit program: "Program change controls - only appropriately authorized, tested and approved changes are made to applications, interfaces, databases and operating systems. All changes are documented so systems documentation is up to date."
c) The techniques for testing are made up of enquiry, observation, inspection of physical evidence and re-performance. Inspection of physical evidence relies on the auditor testing the physical evidence to verify that a control has been performed properly.
d) The manager of a large client realizes that when testing controls, either statistically based sampling techniques or professional judgment can be used to determine the extent of testing. One of the factors to con?sider when deciding the extent of testing should include the competence of the person who performs the control.

Question 48

Emile Santiago was anxious to start the selection and testing of controls at Dooley Real Estate Group, a company that specializes in unique coastal properties nestled along the Nova Scotia coastline. A charming collection of coastal communities dots the rocks along the Bay of Fundy. Buzz Dooley brings years of talent and experience from being an executive in the marketing, technology and finance world to personally owning, renovating, aggregating and subdividing property. Along with investment analysis and extensive contract negotiation experience, clients are expertly represented in every transaction. Buzz imparts a sense of ease and joy to finding the perfect property for each client, making owning beach and coastal property a dream! Emile had two main "big picture" objectives: to prevent or detect misstatements in the financial statements.
Emile was concerned about the following issues:
1) Revenue recognition was the trickiest as many of the transactions took place over longer than one year time frames. Partial payments and deposits are being made and have to be matched up with proper revenue recognition criteria.
2) The entertainment and promotional expenses were high and he was not sure how they compared to industry standards, although they appeared to be consistent with the Dooley Real Estate Group's profile and the deep pockets of its clientele.
Required:
a) What are detective and preventive controls?
b) Can Emile use these preventive and detective controls to help him resolve the two issues he is concerned about?
c) Which factors will Emile have to consider when determining the "extent" of tests to be performed?
d) When would Emile perform substantive testing of revenue?

Question 49

If the tests of controls confirm the auditor's preliminary evaluation of controls, the planned substantive audit procedures are:

A) increased.
B) not modified.
C) reduced.
D) changed.

Question 50

Which of the following statements is incorrect?

A) The less frequently a control is performed, the more testing the auditor needs to perform to be satisfied the control is operating effectively.
B) When other controls related to a particular objective are also in place and are tested, the level of assurance that might be needed from any one control is not as high as if the auditor were relying solely on a single control.
C) The less frequently a control is performed, the less testing the auditor needs to perform to be satisfied the control is operating effectively.
D) The results of the tests in prior audits and the current audit to date affect the perception of risk.

Question 51

Benchmarking is appropriate when:

A) a reliable trail of program changes exists.
B) a programmed control can be matched to a defined program within an application.
C) the application is stable.
D) all of the above.

Question 52

Which of the following would not be included in a test of control working paper?

A) the purpose of the test
B) a conclusion about whether the account balance is materially misstated
C) the work performed
D) the findings/results of the testing

Question 53

What are the main items commonly included in tests of controls working papers?

Question 54

Tests of controls will usually be carried out:

A) at an interim date.
B) only after year-end.
C) only by the audit engagement partner.
D) by the client's board of directors.

Question 55

Explain and provide examples of the various techniques commonly used when testing controls.

Question 56

If inherent risk is high and no assurance has been obtained from controls testing:

A) only overall analytical review procedures need to be performed to reduce detection risk to an acceptable level.
B) no further substantive testing needs to be performed.
C) extensive substantive procedures need to be performed to estimate the dollar value of any error in the account balance.
D) none of the above.